Underwriting Of Issue Of Shares And Debentures Companies Act 1223 - Legal Draft
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UNDERWRITING OF ISSUE OF SHARES AND DEBENTURES
A company cannot allot any shares offered to the public for subscription unless the minimum amount required as stated in the Prospectus has been
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applied for and the amount has been received in money. This is called minimum subscription.4
In the event enough shares are not applied for to raise the minimum subscription the application money has to be returned. To avoid the contingency of minimum subscription not being received by the issue of shares the company may enter into underwriting agreements with the financial institutions, banks and others whereby the bank, financial institutions or other persons assure the company that in case the public do not subscribe for adequate number of shares to raise the minimum subscription, such banks, financial institutions or otlier persons shall take up the requisite or agreed number of shares so that the minimum subscription or money for the entire issue be raised and allotment be made in accordance with the Prospectus, the provisions of the Companies Act 1956 and other Statutory provisions in this regard.
A company may pay a commission to any person in consideration of his agreeing to subscribe for any shares in or Debentures of the company or to procure such subscription. The payment of commission should be authorised by the Articles of the company and it should not exceed 5% of the Issue price or the amount mentioned in the Articles, whichever is less, and in case of Debentures 2.5% of the Issue price of Debentures or the rate mentioned in the Articles, whichever is less. These facts are to be disclosed in the Prospectus.5
This assurance to subscribe or procure subscription for the shares or Debentures of the company, if the minimum subscription is not raised or the entire issue is not subscribed, is called Underwriting. The term means an Agreement to subscribe to shares and/or Debentures of a company in the event the public or the existing shareholders do not subscribe as required by the company.6
To raise the required Capital a company issues shares and/or Debentures and unless such shares and Debentures are subscribed by the Investors the company's purpose will not be served. Underwriting of the shares and Debentures gives an assurance to the company against the risk of inadequate response from the investors and the risk of not obtaining even the minimum subscription.
A person who acts as an Underwriter must hold a certificate from the Securities & Exchange Control Board of India. Every stock-broker or Merchant Banker registered with the Board is entitled to act as an Underwriter without obtaining a Certificate.7
Section 69 of the Companies Act 1956.
Section 76 of the Companies Act 1956.
Rule 2 of Securities & Exchange Board of India (Underwriters) Rules 1993.
Rule 3 of SEBI (Underwriters) Rules 1993.
The Underwriters shall not derive any benefit directly or indirectly from the Underwriting of issue of shares and Debentures other than the commission or the brokerage payable under the agreement for Underwriting or Brokerage. An Underwriter shall not take up underwriting obligations exceeding twenty times of its Net Worth. In case of underwriting public issue when called upon to subscribe the Underwriter within 45 days shall subscribe to such shares or Debentures as agreed.